Post: #1

The general stock market is around 21 P/E ratio right now as it hits all time highs which was also the same P/E ratio before the stock crash in 2008.
It seems to me like stocks are overbought right now on this basis because on average a P/E ratio of 14 or so is more of a fair value. while anything above that starts to become overvalued.

I have owned stock in Discovery Communications(discovery channel/animal planet and many other cable chanels) for years and it has performed very well from the lows in 2008. But its P/E ratio is really high right now at 31. So my question is how important is this when evaluating whether or not to sell or for measuring what the future value of this stock could be? Thanks for any investment input members here have to offer.
http://finance.yahoo.com/q?s=DISCA

Post: #2

In theory, it's important.

But in practice it can be mind-numbing, the imperviousness of market sentiment to intrinsic valuations.

Imagine trying to call the top of the tulip bubble in November, 1636, only to see it double in a few months. And there is no material "E" when it comes to tulip P/Es.

An ultra-low interest rate environment is making all investments look too frothy; everything from government bonds, to investment grade corporate debt, to high yield corporate debt, to stocks look rich.

What looks cheap now is volatility on a historical basis.

But volatility... is well, volatile, so it may not make a suitable source of income, even when it's super-cheap, although it may provide a reasonable source of diversification for one's portfolio.

Post: #3

(05-18-2013 01:51 PM)Kabal Wrote:  In theory, it's important.

But in practice it can be mind-numbing, the imperviousness of market sentiment to intrinsic valuations.

Imagine trying to call the top of the tulip bubble in November, 1636, only to see it double in a few months. And there is no material "E" when it comes to tulip P/Es.

An ultra-low interest rate environment is making all investments look too frothy; everything from government bonds, to investment grade corporate debt, to high yield corporate debt, to stocks look rich.

What looks cheap now is volatility on a historical basis.

But volatility... is well, volatile, so it may not make a suitable source of income, although it may provide a reasonable source of diversification for one's portfolio.

P/E is very important in the long-run but not sooper important in the short-run. A good rule used to be that if your P/E is over 100, it's a bubble. You don't have to short, but you shouldn't buy.

Post: #4

P/E ratio is valuable IF AND ONLY IF you also factor in growth!

Low PE and negative growth = shitty deal.

Moderately high PE and MONSTER growth = potentially an OK deal.

So P/E/G beats P/E any day, really.

Post: #5

On a sidenote are the 'chartists' nutty?

Or is there something in it?

Post: #6

(05-19-2013 05:35 PM)cardguy Wrote:  On a sidenote are the 'chartists' nutty?

Or is there something in it?

Because of high frequency trading there might be something to it. The link below has been a running thread on the precious metals since the start of the year and many short and longer term predicitons have been accurately made.
http://www.tfmetalsreport.com/forum/4460...-big-trade

Post: #7

(05-18-2013 01:51 PM)Kabal Wrote:  In theory, it's important.

But in practice it can be mind-numbing, the imperviousness of market sentiment to intrinsic valuations.

Imagine trying to call the top of the tulip bubble in November, 1636, only to see it double in a few months. And there is no material "E" when it comes to tulip P/Es.

An ultra-low interest rate environment is making all investments look too frothy; everything from government bonds, to investment grade corporate debt, to high yield corporate debt, to stocks look rich.

What looks cheap now is volatility on a historical basis.

But volatility... is well, volatile, so it may not make a suitable source of income, even when it's super-cheap, although it may provide a reasonable source of diversification for one's portfolio.

^ Pretty good reply here
1) There's no single good metric when looking at stocks, although I like P/E on an individual stock basis.
2) Price is always right. No matter the P/E, price action dictates what happens. Look at Amazon to realize P/E as a single indicator is worthless.

Momentum begets momentum. We're in the middle of the most hated rally/bull market, ever. This is definitely due partially to low interest rates making stocks attractive. But not just any stocks - low vol, high yielding stocks are outperforming. Everybody wants to own stocks that pay dividends and 'won't die' if our recovery actually runs out of steam. Which is why this bull market has been lead higher by the world's most boring, stable companies. Further, this is not 1999 where a flood of retail cash has come into the market to bid up stocks for a bubble - the market's been bid up by institutions and high net worth individuals that NEED to put their money SOMEWHERE. This is a good sign. Institutions have far less turnover.

Yields are at all time lows, thus bond prices are at a ridiculous highs. The smallest upticks in interest rates will crush bond holders => people are going to equities. Where else do you put your money? Gold and commodities have proven themselves to be terrible stores of value in recent history.

Are we do for a correction? Yes. probably a 10% correction at this point. Everybody knows it. But right now, the market has zero sellers and zero buyers. nobody knows what to do. IMO, I think this is a good 'hold'. Maybe wait for a dip to actually buy. I wouldn't dare short in front of the momentum though. But P/E as a forward indicator? I wouldn't bet on it.